Is the high growth era of cloud computing over?
By Peter Garnry, Head of Equity Strategy at Saxo
The earnings and outlook from Alphabet and Amazon were not impressive and investors pushed the shares of these companies down in extended trading weighing on Nasdaq 100 futures reversing from their intraday high yesterday. For Google it was the cloud and advertising, while Amazon cannot escape the general slowdown.
One the things that caused both Alphabet and Amazon to disappoint, and also recently Microsoft, was the disappointment in the cloud business which is seeing a significant slowdown in growth. In Q4 2016 the cloud business for Google, Amazon, and Microsoft was a combined $38bn annual revenue business and has grown considerably to a $188bn annual revenue business in Q4 2022. No wonder investors have been betting on these three companies. Cloud has made its inroad into the business world. The selling points have been easy to deploy the technology infrastructure, it scales fast, the up-time and IT security are always excellent. Recently several businesses are beginning to complain about the costs of cloud computing and the lack of transparency in the cost structure for using the three companies’ different machine learning applications on top of just the cloud infrastructure (computing power).
The general slowdown in enterprise technology spending is quite evident now in the cloud business of Google, Amazon, and Microsoft with the revenue growth getting a healthy boost during the pandemic hitting peak growth at 34% y/y in Q3 2021. This growth rate has since slowed to 18.8% y/y in Q4 2022 on a trajectory to the lowest annual growth since Q1 2017. It begs the question of whether the explosive growth of cloud computing is finally coming to an end and thus pulling a growth engine out of these major technology companies. The operating margin has also steadily been declining due to higher operating expenses from among other electricity which has become more expensive due to the energy crisis. While both Amazon and Microsoft are running very profitable cloud businesses, Google’s cloud business lost $480mn in Q4 2022 and improvement from the $1.7bn operating loss in Q1 2020, but still unacceptable from an investor point of view. The reason is most likely that Google is subsidising the cloud business from its ads business to keep prices low to get market share as Google is by far the smallest cloud business of the three.
